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Discussion by Urs Schweizer is a Economics, Econometrics and Finance article available to read on EtoBox.

What is Discussion about?

Pfeiffer ( 2004) examines a hold-up problem where the headquarters of a firm considers to install an information system. Surprisingly enough, even if the installment would be without costs, more information turns out to possibly lower aggregate profits of the firm. To make his point, the author derives an explicit solution for a linear setting and he uncovers parameter values under which his counter-intuitive result occurs. Unfortunately, not much intuition is given for the findings. In the following, I first comment on the paper as a contribution to the theory of incomplete contracts and, second, I establish the main result of the paper in a more general and, hopefully, more intuitive way. In order to simplify the presentation and to focus on the central point, I consider only two states of the world (y L (low) and y H (high)) and I stick to the case where only party A invests. The basic structure is as follows. At stage one, party A decides about investments x before, at stage two, nature chooses the two states with probabilities p L and p H 5 1 À p L , respectively. At stage three, another decision qAQ is due which Pfeiffer restricts to a binary choice. Since this restriction is

Who reads Discussion?

Author

Urs Schweizer

Publisher

Walter de Gruyter GmbH

Published

2004

Field

Economics, Econometrics and Finance (Social Sciences)